The Price-Earnings (P/E) ratio is a valuation metric that compares a company's share price to its earnings per share. The P/E ratio is calculated by taking the current market price per share and dividing it by the earnings per share. Higher P/E ratios generally indicate that investors expect higher future earnings growth. However, the P/E ratio alone does not provide full insight and is best compared against other companies in the same industry or a company's own historical P/E ratios.

1. Definition
of 'Price-
Earnings
Ratio - P/E
Ratio'
A valuation ratio
of a company's
current share
price compared
to its per-share
earnings.
Calculated as:
Market Value
per Share
Earnings per
Share (EPS)
For example, if a
company is
currently trading
at $43 a share
and earnings
over the last 12
months were
$1.95 per share,
the P/E ratio for
the stock would
be 22.05
($43/$1.95).
EPS is usually
from the last
four quarters
(trailing P/E),
but sometimes it
can be taken
from the
estimates of
earnings
expected in the
next four
quarters
(projected or
forward P/E). A
third
variation uses
the sum of the
last two actual
quarters and the
estimates of the
next two
quarters.
Also sometimes
known as "price
multiple" or
"earnings
multiple".

2. Investopedia explains 'Price-Earnings Ratio - P/E
Ratio'
In general, a high P/E suggests that investors are expecting higher
earnings growth in the future compared to companies with a lower P/E.
However, the P/E ratio doesn't tell us the whole story by itself. It's
usually more useful to compare the P/E ratios of one company to other
companies in the same industry, to the market in general or against the
company's own historical P/E. It would not be useful for investors using
the P/E ratio as a basis for their investment to compare the P/E of a
technology company (high P/E) to a utility company (low P/E) as each
industry has much different growth prospects.
The P/E is sometimes referred to as the "multiple", because it shows how
much investors are willing to pay per dollar of earnings. If a company
were currently trading at a multiple (P/E) of 20, the interpretation is that
an investor is willing to pay $20 for $1 of current earnings.
It is important that investors note an important problem that arises with
the P/E measure, and to avoid basing a decision on this measure alone.
The denominator (earnings) is based on an accounting measure of
earnings that is susceptible to forms of manipulation, making the quality
of the P/E only as good as the quality of the underlying earnings number.